US Stock Withholding Tax 2026: A Guide to Claiming FTC Under New Tax Code

Key Takeaways

• Shift to Residence-Based Taxation: Under the proposed Direct Tax Code (DTC) 2025, India will firmly move to a residence-based taxation model. This means Indian residents will be taxed on their global income, making accurate reporting of foreign assets and income, like that from US stocks, more critical than ever.
• Foreign Tax Credit (FTC) is Paramount: Withholding tax, typically 25% on dividends from US stocks for Indian residents who have submitted Form W-8BEN, is not a final tax. This amount can be claimed as a credit against your Indian income tax liability, preventing double taxation. Filing Form 67 before your tax return is a mandatory prerequisite to claim this credit.
• Mandatory Foreign Asset Reporting: Any employee holding RSUs or ESOPs of a US company must disclose these assets in Schedule FA of their Income Tax Return (ITR). This is required even if the shares have not been sold. Failure to report can lead to significant penalties under the Black Money Act.
• Simplified Compliance Framework: The DTC 2025 aims to simplify the tax structure by reducing the number of sections and clarifying rules. This includes potentially replacing Form 67 with a more detailed Form 44 and providing clearer guidelines on foreign income reporting.

PART 1: EXECUTIVE SUMMARY

This guide provides a detailed compliance framework for global tech employees navigating the transition from the Income Tax Act, 1961, to the proposed Direct Tax Code (DTC) 2025, focusing on the taxation of US stock holdings and the claiming of Foreign Tax Credit (FTC).

• The Old Law (Income Tax Act, 1961): Under the 1961 Act, an Indian resident's global income is taxable in India. For income like dividends from US stocks, tax is withheld in the US at a rate of 25% (as per the India-US DTAA). To avoid double taxation, the taxpayer must claim this amount as a Foreign Tax Credit (FTC) in their Indian tax return. This process requires filing Form 67 before the ITR deadline and detailed reporting in Schedule FSI (Foreign Source Income) and Schedule TR (Tax Relief). Concurrently, all foreign financial assets, including vested RSUs and stock options, must be declared in Schedule FA.

• The New Law (Direct Tax Code, 2025): The proposed DTC 2025 intends to replace the 1961 Act to simplify and streamline direct tax laws. It reinforces the residence-based taxation principle, taxing Indian residents on their worldwide income. While the core principle of claiming FTC for taxes paid abroad will continue, the procedural framework is expected to be updated. Proposed changes include replacing Form 67 with a new, more detailed Form 44 and potentially extending timelines for revised returns to better accommodate FTC claims. The DTC aims to reduce ambiguity and litigation through a more structured and consolidated code.

• Who is Impacted: This transition primarily impacts Indian resident employees of multinational corporations, particularly in the tech sector, who receive compensation in the form of Restricted Stock Units (RSUs), Employee Stock Option Plans (ESOPs), or hold other investments in US-listed companies. These individuals must manage dual tax implications: tax at source in the US (e.g., on dividends) and taxation of global income in India. Proper compliance under the new code is essential to leverage DTAA benefits and avoid penalties for non-disclosure of foreign assets.

PART 2: DETAILED TAX ANALYSIS

1. The Challenge for Global Tech Employees

Global tech employees face a unique set of tax complexities. Compensation is often not limited to a cash salary but includes equity like RSUs and ESOPs from a foreign parent company, typically based in the US. This creates a multi-layered tax liability.

• Dual Taxation Points:

  1. At Vesting: The Fair Market Value (FMV) of RSUs on the vesting date is considered a perquisite and taxed as part of salary income in India.
  2. On Dividends: If these vested shares pay dividends, the US government withholds a flat 25% tax (for those who have filed Form W-8BEN). This dividend income is also taxable in India at the individual's slab rate.
  3. At Sale: When the shares are sold, the profit is subject to capital gains tax in India. The holding period to determine long-term (over 24 months) or short-term gains begins from the vesting date.

• Compliance Burden: The primary challenge is not just paying the tax but ensuring impeccable compliance to avoid double taxation. This involves:

  • Claiming Foreign Tax Credit (FTC): The 25% tax withheld in the US is not a loss. It must be meticulously claimed as a credit against the Indian tax liability on the same dividend income.
  • Foreign Asset Reporting: All foreign holdings, including vested but unsold RSUs, must be reported in Schedule FA. The tax authorities receive information from foreign jurisdictions, and any mismatch can trigger scrutiny.
  • Currency Fluctuation: All transactions (vesting, dividend receipt, sale) occur in USD. These must be converted to INR using prescribed exchange rates for accurate reporting, adding another layer of complexity.

2. Statutory Changes: 1961 Act vs 2025 Act

The transition to the DTC 2025 is aimed at simplification, but taxpayers must understand the procedural shifts. While the fundamental right to claim FTC under the India-US DTAA remains, the mechanics of compliance are set to evolve.

3. Schedule FA & Foreign Asset Reporting

The mandatory disclosure of foreign assets in Schedule FA is a cornerstone of India's tax compliance framework and will remain so under the DTC 2025.

Who needs to report? Any individual who is a Resident and Ordinarily Resident (ROR) in India and has held any of the following at any time during the financial year must report it:

• Foreign Bank Accounts: Even if the balance is zero.
• Financial Interests: This includes shares and securities of foreign companies. RSUs and ESOPs granted by a US parent company fall directly into this category.
• Immovable Property outside India.
• Signing Authority in any account located outside India.
• Any other capital asset held abroad.

Key Reporting Details for RSUs/Stocks:

• Country Name and Code (USA).
• Name and Address of the foreign company/brokerage.
• Peak and closing balance/value of the investment during the year.
• Total gross income derived from the asset (e.g., dividends received).

Under the DTC 2025, with increased global data sharing agreements, the importance of accurate and complete Schedule FA reporting cannot be overstated. The Income Tax Department actively uses this information to verify income declared in the ITR.

4. Scenario Analysis

Let's consider a practical example for the tax year 2026-27 under the proposed DTC 2025 framework.

Assumptions:

• Taxpayer: Anjali, a tech employee in India.
• Marginal Tax Rate: 30% (plus 4% cess).
• US Holdings: 500 vested shares of her US-based employer.
• Dividend: Received a gross dividend of USD $1,000.
• Withholding Tax: Tax of USD $250 (25%) was withheld in the US.
• Exchange Rate: 1 USD = ₹85.

Step-by-Step Tax Calculation & Compliance:

1. Calculate Total Foreign Income in INR:

   • Gross Dividend: $1,000 * ₹85 = ₹85,000.
   • This amount will be included in her "Income from Other Sources."

2. Calculate Indian Tax Liability on this Income:

   • Tax at 30%: ₹85,000 * 30% = ₹25,500.
   • Add 4% Cess: ₹25,500 * 4% = ₹1,020.
   • Total Indian Tax Due: ₹26,520.

3. Calculate Foreign Tax Paid in INR:

   • Tax Withheld in US: $250 * ₹85 = ₹21,250.

4. Determine Admissible Foreign Tax Credit (FTC):

   • The FTC is the lower of:
     • Tax paid in the foreign country (₹21,250).
     • Indian tax payable on that foreign income (₹26,520).
   • In this case, the admissible FTC is ₹21,250.

5. Calculate Final Tax Payable in India:

   • Indian Tax Due: ₹26,520.
   • Less: Foreign Tax Credit: ₹21,250.
   • Net Tax Payable in India on Dividend: ₹5,270.

Compliance Actions for Anjali in 2026:

• She must file the new Form 44 (proposed) before filing her ITR, providing proof of the $250 tax paid in the US.
• In her ITR, she will report ₹85,000 as dividend income.
• She will claim an FTC of ₹21,250 in Schedule TR.
• She must report her holding of 500 US shares in Schedule FA.

5. Compliance Checklist 2026

For global tech employees, here is a definitive checklist for navigating the first tax year under the DTC 2025:

• [ ] Collate All Foreign Asset Documentation: Gather statements from your US brokerage account (e.g., Form 1042-S) which serve as proof of dividends paid and taxes withheld.
• [ ] Verify Form W-8BEN Status: Ensure your W-8BEN form is up-to-date with your US broker. An expired form can lead to a higher withholding of 30% instead of the 25% treaty rate.
• [ ] Track All Foreign Income: Maintain a detailed record of all foreign income events: RSU vesting dates and FMV, dividends received (gross amounts), and share sale details.
• [ ] Use Correct Exchange Rates: Use the Telegraphic Transfer Buying Rate issued by the State Bank of India on the last day of the month preceding the month of the transaction for currency conversion.
• [ ] File Form 44 (or a new equivalent) Pre-ITR: This is a non-negotiable step. Login to the e-filing portal and file the FTC claim form before proceeding with your main income tax return.
• [ ] Complete Schedule FA Accurately: Disclose all foreign holdings, including vested RSUs, shares held in brokerage accounts, and foreign bank accounts.
• [ ] Cross-verify ITR Schedules: Ensure the FTC claimed in Form 44 matches the details entered in Schedule TR and Schedule FSI of your ITR.
• [ ] File ITR Before the Due Date: While extensions for revising returns may exist, it is best practice to file the original return accurately and on time to avoid interest and penalties.

💡 Tech Employee Tip: Restructuring your salary or vesting RSUs? Understand the new capital gains rules for 2025.